Lockups Revisited

53 Pages Posted: 15 Feb 2001

See all articles by James C. Brau

James C. Brau

Brigham Young University

Val E. Lambson

Brigham Young University - Department of Economics

Grant Richard McQueen

Brigham Young University - Department of Business Management

Date Written: November 2003


We present a theoretical model that shows how the incentives of insiders, underwriters, and investors can interact with the nature of the firm's assets to explain the existence of lockup agreements. Lockups are commitments by insiders of stock-issuing firms to abstain from selling shares for a specified period of time after the issue. Our model shows how lockups can be a signaling solution to the adverse selection problem resulting from information asymmetries at the time of the stock issue. Specifically, insiders of good firms put and keep (lock up) their money where their mouth is, a signal that can be too costly for insiders of bad firms. Our model yields two comparative statics: lockups should be shorter when the degree of asymmetric information is small (high-transparency firms) and when the cost of mimicking is high (risky firms). Using a sample of 4,013 initial public offerings and 3,279 seasoned equity offerings between 1988 and 1999, we find empirical support for our theoretical predictions.

Keywords: Lockup, Signaling, New Equity Issues, IPO, SEO

JEL Classification: G14, G32

Suggested Citation

Brau, James C. and Lambson, Val Eugene and McQueen, Grant R., Lockups Revisited (November 2003). Available at SSRN: https://ssrn.com/abstract=259295 or http://dx.doi.org/10.2139/ssrn.259295

James C. Brau (Contact Author)

Brigham Young University ( email )

TNRB 640
Marriott School
Provo, UT 84602
United States
801-318-7919 (Phone)
801-422-0108 (Fax)

HOME PAGE: http://marriottschool.byu.edu/emp/brau/

Val Eugene Lambson

Brigham Young University - Department of Economics ( email )

130 Faculty Office Bldg.
Provo, UT 84602-2363
United States
801-378-7765 (Phone)

Grant R. McQueen

Brigham Young University - Department of Business Management ( email )

TNRB 636
Provo, UT 84602
United States
801-422-3017 (Phone)

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